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Introduction to Testing

Introduction to Testing

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Published by: daytrading on Jun 11, 2008
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Introduction to TestingTrading Ideas
Henry Carstens, Vertical Solutionshttp://www.verticalsolutions.com/February 13, 2007
 
 Introduction to Testing Trading Ideas
- 2 -
Introduction
If Someone Says…
If someone says, “I’m making money buying the SP futures on Friday’s close and sellingon Monday’s close, you’ve got to get in on this!” How would you know whether that ideawas a good or bad?What about a new trading idea you have – is it good or bad and how do you tell?The way you tell is by testing. Testing is nothing more than learning the life history of atrading idea and it’s done by turning trading ideas into trading rules and letting thecomputer test the rules and give you back the ideas life history. Here, for example, is asnippet of the life history of the Buy Friday Sell Monday idea –Are you more comfortable with “You’ve got to get in on this,”after seeing this test thanyou were before seeing it?
 
 Introduction to Testing Trading Ideas
- 3 -
 Who This Introduction Is For 
This introduction is for traders who have never tested their ideas against a large amountof historical data, it is about looking back over years to learn the life history of a tradingidea.Its scope is a gentle introduction to testing trading ideas, not an all-encompassing opus.
 Where We Are Going
I am going to teach you how to test trading ideas. I’m going to teach you how to learn thelife history of any trading idea, in any market and any time frame. When we’re done,you’ll know how to test your ideas against historical data (or partner with someone whodoes) and how to begin evaluating those tests.Remember, just because you test a system with a computer, doesn’t mean you have totrade the system with a computer. Testing doesn’t affect how you trade, it affects whatyou trade.
 Why Testing is Important
Testing is important because it helps a trader separate good trading ideas from bad onesin a scientific manner.Testing is also important because the market changes. Trading ideas ebb and flow ineffectiveness - it’s an ever changing cycle that some ideas handle better than others. Onlyby testing can we identify how well a trading idea has handled and is likely to continuehandling the test of time.
Discretionary Traders, Mechanical Traders andMechanical Trading Systems
Discretionary traders trade based on ‘feel’ for the market. Mechanical traders put rules,like our buy Friday sell Monday rule, into a computer and let the computer trade the rule.In between these two extremes, there are discretionary traders with rules and mechanicaltraders who turn their computers on and off using discretion. The middle, I suspect,encompasses just about everyone.A mechanical trading system isn’t any different than a discretionary one; it’s just that thetrading rules have been written for a computer instead of a person.

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